After bailout, Alarion has missed 6 of its interest payments to TARP

In an effort to wind down the Troubled Asset Relief Program banking bailouts, the U.S. Treasury auctioned off Alarion Financial Services Inc.’s preferred stock for an estimated $6.73 million.

By Susan Latham CarrStaff writer

In an effort to wind down the Troubled Asset Relief Program banking bailouts, the U.S. Treasury auctioned off Alarion Financial Services Inc.’s preferred stock for an estimated $6.73 million.

As of June 30, Alarion Financial, the holding company for Alarion Bank with headquarters in Ocala, had missed six of its bank bailout payments to the Treasury totaling $532,560.

“That is something that the regulators determine whether we do or not, and we follow their direction,” Loralee Hutchinson, Alarion’s chief executive officer and president, said.

In January 2009, Alarion received $6.5 million from the Capital Purchase Program of the Troubled Asset Relief Program, commonly referred to as TARP.

That program was initiated to stabilize the failing financial system by providing money to banks to help them absorb losses. The idea was to get credit flowing and avoid a collapse of the banking system.

Funds from the Capital Purchase Program went to 707 financial institutions in 48 states.

But the program was not a giveaway. In exchange for the money, the Treasury received preferred stock and securities from the institutions. Most of the institutions pay the Treasury an additional 5 percent dividend on preferred shares for the first five years and a nine percent rate after that. The Treasury also received warrants to purchase common shares or other securities from the banks in order to enable taxpayers to earn additional returns on their investments as the banks recovered.

In a July 24 report to Congress, the Office of the Special Inspector General for TARP (SIGTARP) said that as of June 30, Alarion missed its sixth payment of interest or dividends on the money it borrowed.

Alarion already had paid close to $1 million in interest and dividend payments on the $6.5 million it received under the program.

“We look at the principal and interest and dividend payments as separate obligations,” said Troy Gravitt, SIGTARP’s director of communications.

With the principal and outstanding dividends, Alarion owed the Treasury about $7 million.

“Each institution is going to be in a different situation,” Gravitt said. “It may be a temporary situation where a bank is unable to pay. Some institutions have missed as many as 18 dividend and interest payments.”

When institutions miss six or more payments, the Treasury may choose to appoint someone as an observer to the institution’s board of directors. That depends on various factors, such as the amount of money owed. That was not the case with Alarion.

When asked why Alarion had not paid its dividends, Hutchinson said regulators make their determinations.

“They have their own criteria,” Hutchinson said. “All we do is respond to what they tell us. Frankly, the government entities do not work hand-in-hand.”

She said the bank has no control over that.

“We are plugging right along here and making progress,” Hutchinson said. “We think we are poised to do some really great things.”

The Federal Deposit Insurance Corporation regulates Alarion.

“We would not discuss anything regarding an open and operating institution,” said FDIC spokesperson LaJuan William-Young when asked why they told Alarion not to pay the TARP dividends. “Our discussions with the bank are confidential.”

Gravitt said it is SIGTARP’s recommendation that the Treasury work with these banking regulators on the proper repayment process.

“We would argue that Treasury is not a private investor but has a public responsibility for stability of these institutions as a source of economic activity,” Gravitt said.

For Alarion, the five-year dividend rate of 5 percent was due to increase to 9 percent in January 2014. If a bank cannot pay the 9 percent it can negotiate with the Treasury to have the 5 percent rate extended.

In the end, the Treasury owns a portion of the bank through the stock and can do one of three things: It can sell the shares back to the bank; it can sell the shares on the open market; or it can be part of a restructuring, which could attract new investors or a new institution.

In Alarion’s case, the Treasury decided to auction the stock.

The Treasury on July 22 sold Alarion’s 6,514 shares of preferred stock Series A stock at $982.90 per share and 326 shares of preferred stock Series B at $1,045.31 per share, for a total of $6.7 million.